Monday, July 23, 2018

disruptive innovation and stages of revolutionary technology? (unified model)

There are three stages in the theory of disruptive innovation. Market disruption happens when
1) a cheaper, inferior product finds a niche market, 
2) improves over time, and then 
3) comes to dominate the mainstream.

Perhaps this can be merged with a model of the evolution of bold new products and technologies and the relationship between the corporation and the economic and political realms. A corporation that pioneers a revolutionary technology thereby establishes itself as a
a) monopoly upon emergence, but enters
b) market competition as technical sophistication accrues, and comes under 
c) state ownership as the technology becomes obsolete in the mainstream market but remains an essential service for disadvantaged communities.

A unified model would look like:

1) An inferior product or technology finds a niche market, but
2) it improves over time, and then 
3) it comes to dominate the mainstream, 
4) creating a temporary corporate monopoly, which is replaced by 
5) open market competition as technical sophistication accrues, followed by
6) state ownership as the technology becomes obsolete in the mainstream market but remains an essential service for disadvantaged communities.

The corporate monopoly might not necessarily derive from disruptive innovation. There is also "sustaining innovation", in which a product or technology innovates but does not transform mainstream markets. This might sometimes involve monopoly. There are two forms of sustaining innovation: 

1) "evolutionary sustaining innovation" that improves current products. This is innovation at the service of the status quo. An example of an evolutionary sustaining innovation might be the saddle and the stirrup in horseback riding, which made riding much easier. Also, innovation in Japan seems to follow the pattern of relentlessly modifying established technologies coupled with a seeming reluctance to introduce truly disruptive products. Perhaps there are dual objectives in the system of constant incremental improvements known as "kaizen": 1) to promote relentless evolutionary sustaining innovation so as to 2) forestall disruptive innovation. In such a context, a large conglomerate like Sony could maintain multiple monopolies. (One problem with a system that promotes constant tweaks of an established product is that the product ends up "steampunked" with futuristic features on an old-fashioned platform. For instance, the Japanese did not readily adopt smartphones because their older basic cellphones already had the advanced features that American could only get through smartphones.) 


2) "revolutionary sustaining innovation" that introduces a revolutionary new product that nevertheless fails to sweep aside the old product. That is, it creates a new niche market without destroying the old market. An example of a revolutionary innovation would be the invention of the automobile, which was originally a luxury product for wealthy Europeans that did not widely affect the field of transportation. The first automaker was Mercedes-Benz in the 1880s, and Mercedes did establish somewhat of a monopoly in the niche of luxury auto making -- albeit without disrupting transportation in general. (Disruptive innovation happened when Henry Ford mass produced the simple, cheap Model T, which made horse-drawn carriages obsolete. Tesla is a bit like Mercedes struggling to be like Ford.)

Where is Netflix right now in this model of development?

A cursory glance suggests that everything is "onward and upward" for Netflix.

https://www.bbc.com/news/business-44904368

For some investors, Netflix is still in the lucrative early stages of monopoly in video streaming (stage 4). For others, Netflix is transitioning to open market competition against an ever-increasing slew of rivals (stage 5).

https://slate.com/business/2018/07/why-netflixs-share-price-dropped.html

Why is Netflix stock so volatile? The answer is that it’s very close to being a binary bet: Either the company will effectively replace television in hundreds of millions of households around the world, becoming the dominant media monopoly of the 21st century, or else it will go bust. What’s more, both of those outcomes are far too far in the future to be able to predict with any certainty: Every earnings report, every data point coming out of Netflix HQ, is entirely consistent with both stories.        

The question is whether Netflix can maintain subscriber growth. As long as it does, it can remain in the monopoly stage. To do so, Netflix needs to sustain a virtuous circle of increasing subscriptions that will encourage new investment which will in turn fund new content (which will attract more subscribers, etc.).

The paramount importance of subscriber growth is explained in a fantastic piece by former Amazon Studios strategy head Matthew Ball, who is probably the most insightful Netflix analyst out there. Ball explains that, as far as Netflix CEO Reed Hastings is concerned, the company is still in the early stages of a very long game, as its 40 percent year-on-year revenue growth suggests. (Mature companies, by definition, never grow that fast.) Netflix’s subscriber base of 56 million U.S. households, on top of another 68 million outside the U.S., is enormous—but it’s still well short of the 250 million households without which, Ball argues, Hastings’ business “will buckle and break.”        

The article asserts that Netflix sustains growth by churning out merely adequate content that people will watch when there is nothing else on. However, Netflix fails to create the kind of shows like "The Sopranos" that are resounding cultural events. The article concludes that this will eventually be a problem for Netflix.

Contrary to that pessimistic forecast, in terms of disruptive innovation, mediocre content might not imply a fatal prognosis for Netflix. (Not yet, at least.)

In classic disruptive innovation, an inferior product finds a niche, improves over time and then dominates the mainstream. Netflix originally occupied such an odd niche market when it competed against Blockbuster Video by mailing DVDs to customers. Netflix embraced video streaming in 2007 before everyone else did, and thereby came to dominate a new market; this was an inferior experience because smart TVs and Roku were not marketed until 2008, and the iPad until 2010, so Netflix was initially a computer experience (it was inspired by observing that viewers enjoyed YouTube despite a lack of high definition). It has maintained that dominance by producing its own content because other content providers are fickle or can sell directly to consumers. It has thus pioneered and dominated three markets: mail-order DVD rentals, video streaming and producing content for streaming.

The question is, In which stage of disruptive innovation is Netflix in terms of content production? In the earliest stage of disruptive innovation, a niche market tolerates and accepts inferiority because it is cheap and convenient. In the next stage, the product improves over time.

Does Netflix's "pretty good" content appeal to a marginal niche market? Not according to the article, which asserted that it is aimed at everyone, everywhere. It is as if by pioneering bold new technology, Netflix went straight to the third stage of disruptive evolution -- dominating the market -- and skipped over the first two stages of finding an odd niche on the margins of video streaming and improving over time. 

YouTube might be a prime example of a company that is still in the first stage of disruptive innovation in terms of streaming video and content creation. On YouTube, ordinary people make and post videos, filling a niche for viewers who want to watch things like cat videos. That is free user-generated content, like Wikipedia. 

In contrast, Netflix offers content typical of standard cable television that appeals to the mainstream television viewer, and not the cheap, inferior content characteristic of early disruptive innovation, in which a product finds a niche on the fringes and improves over time. From this point of view, "mediocre" is too good. Like YouTube, Netflix should be substandard and amateurish in its earliest stage of disruption. 

However, with its slew of mediocre shows, Netflix might be the cheaper, inferior product that has found a niche in terms of competing against high-end cable television. Moreover, there are signs that Netflix has improved over time. In developing "House of Cards", Netflix began to compete directly with HBO.

Do Netflix and HBO compete with each other? If they did, HBO and Netflix would be imitating one another. Netflix would occasionally aspire to produce the kind of critically acclaimed shows that HBO specializes in; indeed, Netflix is doing just that (e.g., "Orange is the New Black", "The Crown"). HBO would in turn imitate Netflix in terms of simply churning out all sorts of shows to attract as many viewers as possible. 

This is precisely what AT&T, HBO's new overlord, wants HBO to do. This could either dilute quality or lead to new hit shows.

https://www.bloomberg.com/news/articles/2018-07-19/hbo-s-new-bosses-at-at-t-want-network-to-be-more-like-netflix

“If you throw another billion at HBO and it gets stretched thin, then suddenly they don’t make hit shows,” Martin said. “That’s a real risk.”

Right now, HBO is far more profitable than Netflix. The network had $2.15 billion in operating income last year, compared with $838.7 million for its online rival.

For AT&T executives, the question is also whether additional new programming will attract enough new subscribers to pay the added cost or whether profitability suffers. Raising HBO’s price would make the network look less compelling than services like Netflix and Hulu, where entry-level subscriptions cost $8 a month. A bigger budget could also mean that HBO no longer passes on hits that end up elsewhere -- the case with Netflix’s “House of Cards.”

HBO doesn’t need to spend as much as Netflix to make its new bosses happy, according to John Janedis, an analyst at Jefferies LLC. The network could ante up an additional $300 million to $500 million a year to create five or six more original series. At least one of those could yield a new hit like “Veep” or “Silicon Valley,” Janedis said.

“You just need one show to hold an audience,” Janedis said.

HBO is being disrupted by Netflix and so it must imitate Netflix. That is interesting because HBO (Home Box Office) was once itself a disruptor when it emerged in 1972 and offered a convenient, inferior alternative to going to a movie theater. This means that Netflix is likewise competing against cinema.

This might help to explain two recent trends in Hollywood: the rise of the superhero franchise and the abandonment of the star system (actors in superhero roles like Batman are interchangeable). In the superhero genre, Hollywood blockbusters have become akin to television series, with ensemble casts and endlessly evolving storylines. Movies seem to be imitating television; perhaps they are being disrupted by it. If so, HBO and Netflix are well situated to replace movies.
In terms of Netlix losing its monopoly, there are powerful new challengers. Walmart has announced that it will launch a Netflix competitor that will produce its own content. 


Walmart's real target is Amazon Prime Video. But it seems an odd and overconfident response by Walmart to create a competing service in a harsh and unfamiliar market (a bit like Microsoft's attempt to create its own smartphone operating system). An alliance with a rival's main adversary is a more conventional and sensible policy (at least in international relations). Walmart might be better off simply cooperating with any one of Amazon's Prime Video competitors, like Netflix or Disney. 

This raises the specter of media consolidation. Is consolidation really something to worry about? 


Again, the theory of stages of revolutionary technology asserts that 
a) a revolutionary technology initially creates a corporate monopoly, but this is eventually
b) undercut by open market competition that derives from innovation, and is ultimately
c) consigned to obsolescence, although the government maintains a semblance of it for the sake of disadvantaged communities. 

Corporate consolidation does not fit into this scheme. Perhaps the attempt to create monopolies by merging various corporations is a symptom that these corporations have exited their monopoly phase and entered into open market competition -- and are trying to turn back the clock and re-establish a monopoly. For example, when Verizon's customer base ceased to grow, shareholders pressured the company to purchase two obsolete companies, AOL and Yahoo; likewise with AT&T's attempted purchase of Time Warner. As people "cut the cord" and lose interest in traditional (cable) television, Comcast and Disney are compelled to buy Fox in order to acquire more content that can be streamed. Corporate consolidation in these cases is a sign of panic, not greed. 

By that measure, the fact that Netflix has not attempted to merge with or purchase another corporation is a sign of its vitality: it is still in its monopoly phase. Likewise, although Amazon did buy Whole Foods, the fact that they are in considerably different markets is a sign of Amazon's health: Amazon is still in the monopoly phase within its own field. 

Media consolidation might be scary, but not just because it might entail the rise of a new monopoly that will dominate the political realm (as in Italy with Silvio Berlusconi). Rather, it might be a symptom that so much of the media landscape is transitioning away from its lucrative and stable monopoly phase.
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Friday, July 13, 2018

"Hospital communities" for schizophrenics?

The deinstitutionalization movement in mental health care involves transitioning patients out of mental institutions.


Deinstitutionalisation (or deinstitutionalization) is the process of replacing long-stay psychiatric hospitals with less isolated community mental health services for those diagnosed with a mental disorder or developmental disability. In the late 20th century, it led to the closure of many psychiatric hospitals, as patients were increasingly cared for at home or in halfway houses, clinics and regular hospitals.

Deinstitutionalisation works in two ways. The first focuses on reducing the population size of mental institutions by releasing patients, shortening stays, and reducing both admissions and readmission rates. The second focuses on reforming psychiatric care to reduce (or avoid encouraging) feelings of dependency, hopelessness and other behaviors that make it hard for patients to adjust to a life outside of care.[1]

The modern deinstitutionalisation movement was initiated by three factors:
  • A socio-political movement for community mental health services and open hospitals;
  • The advent of psychiatric drugs able to manage psychotic episodes;
  • Financial imperatives (in the US specifically, to shift costs from state to federal budgets)[2]
The movement to reduce institutionalization was met with wide acceptance in Western countries, though its effects have been the subject of many debates. Some experts, such as E. Fuller Torrey, have argued that deinstitutionalization was a mistake,[3] while others, such as Thomas Szasz, argue it did not provide enough freedom for patients.[4] Others have argued that it was an improvement on the system that existed before. Psychiatrist Leon Eisenberg has argued that it has generally been beneficial for psychiatric patients, while noting that some were left homeless or without care.

In the US, deinstitutionalization was carried out on a large scale in the 1970s. These released patients have become emblematic of the homeless population. 

Mental hospitals once had the reputation of being dungeons for the insane. A new hope arose in the 1970s. The "pharmaceutical revolution" suggested that with medication, patients could become normal, functioning citizens. After a period of training and socialization in halfway houses, patients could be reintroduced into society.

One problem with this is that those halfway houses were closed down because of budget cuts and ... reluctant taxpayers. (For example, the 1970s were also the time of Proposition 13 in California, which dramatically slashed property taxes.) Another problem is that once patients fall off their medication, they lapse back into a dysfunctional state. So instead of being out of their minds in a dungeon, they are now out of their minds at a bus stop or under a bridge -- and vulnerable to nature's elements and to the worst people in society. 

One argument is that if mental hospitals were recreated in the 21st century, with medication and counseling, the patients would be relatively normal. The environment in a modern mental hospital would be relatively safe and orderly. The problem with this is that taxpayers prefer to fund things that are tangibly beneficial in their own lives, and to them, the fate of the severely mentally ill is an abstraction. (Even if a program did help to remove many homeless from the streets -- which taxpayers could see with their own eyes -- and taxpayers were initially enthusiastic over this, over time they would forget about it, and pressure would eventually mount to end the program.)

So how to create an environment for patients where they are under supervision so that 1) they can be compelled to take their medication, and 2) they are protected from abuse?

Moreover, how can this be done in a cost-effective manner?

Here's a hybrid proposal -- to create an environment that is both a self-enclosed hospital and also an actual society. 

One would take an entire small town and turn it into a functioning "hospital". Patients would live and work in their small town ... permanently. No one would leave, and, with few exceptions, nobody would be allowed to enter from the outside world. It would be a functioning society run largely by the patients, but it would be a very supervised, controlled environment -- in fact, a hospital.

How big would these hopital towns be? Schizophrenics supposedly make up 1% of the population, so roughly 1% of people would live in these hospital communities. Of course, some schizophrenics are already assimilated into society, but this percentage gives a general idea. Also, a "hospital town" could serve more than just patients who suffered from schizophrenia.

In any case, almost anything seems better than the current system, which is to dump helpless folks on the street.
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Monday, July 9, 2018

Stages of technology? (monopoly, market, state)

Should governments go beyond mere regulation of energy utilities via PUCs? Should governments assume control of corporate energy utilities and make them government agencies? That is, should private, for-profit utilities be transformed into public, government-owned utilities?

When governments own utilities outright, there is greater investment in renewable energy because the funds that would otherwise go to high executive salaries can be used in other ways. Also, government-owned utilities tend to have more workers, so that in the aftermath of a natural disaster, recuperation is quicker. Also, privately owned utilities tend to exert extensive influence on the political system, a situation that does not exist when the utility is publicly owned.


On the other hand, publicly owned utilities are not so perfect. They are reluctant to raise rates to improve infrastructure, and are less likely to comply with regulations that burden citizens.


But according to a forthcoming paper in the American Journal of Political Science,the public utility model has some drawbacks, too. Its reliance on public support can compromise its ability to make crucial infrastructure upgrades. As a result of poor funding, public utilities can also fail to meet federal public regulations. And yet regulators are more lenient with them than with private utilities, since harsh punishment only further hurts the public.

Public utilities do have their virtues. They impose lower rates upon poorer customers and encourage conservation.

Indeed, because private utilities prioritize their investors rather than their customers, they have little incentive to create, for example, tiered rate structures that are crucial for low-income households. “Low-income pricing schemes and rebate schemes and retrofitting—those are not going to be something the investor engages in, unless they have that in their contract with the municipality,” says Teodoro.

Public utilities do another thing that private utilities have little incentive to do: conserve. To use the example of water again, Americans’ per capita daily water use has plummeted in the last several decades—largely a triumph of conservation efforts by public utilities. “In what other business do people say, ‘Please buy less of our product’?” says Teodoro. “No private utility would ever do that.”
Perhaps both systems are equally bad, the only difference between them being that they benefit different types of insiders. In the public utility model, the taxpayer is milked by civil servants and trade unions, whereas in the private utility model, the ratepayer is exploited by corporate executives and shareholders. Measles and mumps.


The difference is in where the rents go. In a public ownership model, typically management will team up with the rank-and-file workforce to divide the spoils. In a regulated monopoly model, management has more incentives to squeeze compensation and divide the spoils with shareholders instead. That is obvioulsy a very important difference to the specific people involved. But in terms of the public interest you are stuck with the problem of basic institutional quality and good governance. Here in the D.C. area, we run PEPCO as a regulated private and PEPCO has a ton of problems. We run WMATA as a publicly owned entity and WMATA has a ton of problems. In both cases, there appears to be systematic underinvestment in basic infrastructure and capacity. In WMATA's case the workforce benefits from that (see, e.g., the terrible escalator management system) while for PEPCO the gains accrue more to shareholders. 

This Slate article inspired a counter-argument in Forbes that asserted that the level of regulation that is applied to a company should depend on whether or not the industry in question is a "natural monopoly". In some markets, serious competition is unrealistic because of the high cost of entry for newcomers. For instance, in terms of delivering water, electricity, natural gas or telephone service, no competitor can build new infrastructure to compete with preexisting pipes and wires. Natural monopolies should therefore be run as regulated, for-profit private utilities; all other sectors of the economy, including power generation, should be left to market competition. 


In the US a utility is usually made up of two things, power generation and power distribution. It is true that, to a very large extent (large consumers like industry much less so, households definitely so), power distribution is a natural monopoly. There's not going to be enough gains from competition to cover the cost of having two sets of power distribution lines. Thus we never do end up with two sets of power distribution lines. Thus they're all natural monopolies.



But feeding the power into those lines is not a monopoly in any manner at all. There's absolutely no reason at all why the people who generate the electricity (whether it be from solar, wind, coal, gas, nuclear) should be the same people who own the power lines. It's just fine to have an open and competitive market in power generation: it's that distribution part that you've got to watch.

Thus this is the part that you've got to solve before you decide upon the public or private nature of the monopoly: stripping out the parts that are not monopoly and leaving them to regulated by the competition of the market. Which leads to something along the lines of the English electricity market. The National Grid is privately owned, is a monopoly, and is highly regulated as to rates of capital return and so on. 

Power generation operates in a free market (subject to all the usual rules on safety etc) and the price which the grid can charge for carrying the power is regulated. It's important to make sure that no one is allowed to own sufficient of the generating capacity to be able to dictate prices. Further, to make absolutely certain that the grid cannot own any power stations.

But once you've done that you've reduced the problem to manageable proportions. For example, your power regulators don't have to worry themselves about the price of electricity: that's set by the market. The regulatory control only has to be over the part which really is the monopoly.
Interestingly, the idea of public ownership of utilities disappeared in this Forbes article. The Slate article questioned the worth and dubious motives of both public utilities and private utilities, whereas the Forbes article responded that the merits of private utilities and open markets depend on context. 

This incongruous response does the service of introducing the third option -- open market competition -- which is absent from most of the debates on the value of public, government-owned utilities versus private, for-profit utilities.

Historical context is also missing from the conversation. 

There seems to be a tendency for bold new technologies to create temporary monopolies. 

Perhaps the single greatest example of this is the rise of the railroads in the USA in the aftermath of the Civil War. The railroads were unique in that they not only overshadowed the transportation sector, but they also dominated the general economy (e.g., agriculture) and the political system (supposedly every congressman and governor was on the payroll of railroads). This development set the stage for a strong regulatory federal government. (Another notorious example is the Standard Oil monopoly.)

Anti-monopoly legislation either 1) regulates an industry as though it were a private, for-profit utility, or 2) breaks conglomerates into competing companies (and prevents mergers). 

These two policies stands in contrast to the practice, more common in other societies, of nationalizing sectors like oil production and railroads and placing them under government ownership. American railroads were temporarily nationalized during the First World War. 


The United States Railroad Administration (USRA) temporarily took over management of railroads during World War I to address inadequacy in critical facilities throughout the overall system, such as terminals, trackage, and rolling stock. President Woodrow Wilson issued an order for nationalization on December 26, 1917.[40] Management by USRA led to standardization of equipment, reductions of duplicative passenger services, and better coordination of freight traffic.[28]:175Federal control of the railroads ended in March 1920.

But the initial policy toward railroad monopolies was indirect control by a government commission that enforced extensive regulations -- essentially, the private utility model.


The Interstate Commerce Act of 1887 is a United States federal law that was designed to regulate the railroad industry, particularly its monopolistic practices.[1]The Act required that railroad rates be "reasonable and just," but did not empower the government to fix specific rates. It also required that railroads publicize shipping rates and prohibited short haul or long haul fare discrimination, a form of price discrimination against smaller markets, particularly farmers in Western or Southern Territory compared to the Official Eastern states.[2][3] The Act created a federal regulatory agency, the Interstate Commerce Commission (ICC), which it charged with monitoring railroads to ensure that they complied with the new regulations.
The Act was the first federal law to regulate private industry in the United States.[4] It was later amended to regulate other modes of transportation and commerce.
The railroads responded by increasing coordination with one another, especially on rates. This was deemed by the federal government to be an attempt at further monopoly, and it triggered antitrust legislation.


Morgan set up conferences in 1889 and 1890 that brought together railroad presidents in order to help the industry follow the new laws and write agreements for the maintenance of "public, reasonable, uniform and stable rates." The conferences were the first of their kind, and by creating a community of interest among competing lines paved the way for the great consolidations of the early 20th century.[34]:352–96Congress responded by enacting antitrust legislation to prohibit monopolies of railroads (and other industries), beginning with the Sherman Antitrust Act in 1890.

The goal of antitrust legislation is to foster competition within an industry. This diverged somewhat from the earlier strategy of indirect government control via a regulatory commission. 


United States antitrust law is a collection of federal and state government laws that regulates the conduct and organization of business corporations, generally to promote fair competition for the benefit of consumers. (The concept is called competition law in other English-speaking countries.) The main statutes are the Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914. These Acts, first, restrict the formation of cartels and prohibit other collusive practices regarded as being in restraint of trade. Second, they restrict the mergers and acquisitions of organizations that could substantially lessen competition. Third, they prohibit the creation of a monopoly and the abuse of monopoly power.

The railroads were eventually deregulated in the 1970s and 1980s.

Congress passed various railroad deregulation measures in the 1970s and 1980s. The Railroad Revitalization and Regulatory Reform Act of 1976 (often called the "4R Act") gave railroads more flexibility in pricing and service arrangements. The 4R Act also transferred some powers from the ICC to the newly formed United States Railway Association, a government corporation, regarding the disposition of bankrupt railroads.[19] The Staggers Rail Act of 1980 further reduced ICC authority by allowing railroads to set rates more freely and become more competitive with the trucking industry.

The oil industry, in contrast, was never governed by a regulatory commission. Accusations of monopoly leveled against Standard Oil led straight to the enactment of antitrust laws.


The assumption that railroad and oil monopolies could be broken up into competing segments might be evidence of the maturity of the technology and the industry in question. Governments, via regulatory commissions, seek not only to control and guide, but also to protect utilities. But natural monopolies eventually become unnecessary in the face of economic growth and diversification. For example, Standard Oil had already lost significant market share by the time it was dismembered by the federal government.


Some economic historians have observed that Standard Oil was in the process of losing its monopoly at the time of its breakup in 1911. Although Standard had 90 percent of American refining capacity in 1880, by 1911 that had shrunk to between 60 and 65 percent, due to the expansion in capacity by competitors.

Since the breakup of Standard Oil, several companies, such as General Motors and Microsoft, have come under antitrust investigation for being inherently too large for market competition; however, most of them remained together.[53][54][55] The only company since the breakup of Standard Oil that was divided into parts like Standard Oil was AT&T, which after decades as a regulated natural monopoly, was forced to divest itself of the Bell System in 1984.

Some industries are unique in that they remain at length in the natural monopoly stage and cannot be broken into competing parts. For example, the antitrust model is still not applied to fields like water and energy distribution, where the technology has not appreciably evolved. In these cases, the regulated private utility model seems more appropriate. 

But change happens. Once the technology does advance and complexify, the sector in question no longer resembles a natural monopoly. At that point, the monopoly is dismantled in favor of a competitive marketplace. This happened to the railroad industry, and also to telephony. Although telephony is still often categorized as a natural monopoly, in the 1980s, AT&T's Bell System was broken up into competing phone companies; the technology had become much more sophisticated to allow for this (especially later with the emergence of cell phones). Likewise, in the future, as the cost of atmospheric water generation falls, water distribution may cease to be perceived as a natural monopoly and become subject to market competition. (The future of water markets may see increasing distributed generation coinciding with decreasing consumption -- the same two trends that have taken hold in energy markets in the developed world and, recently, in the developing world, as well.)

Even without antitrust legislation, some monopolies are simply overcome by market competition. For example, Ford Motor Company maintained a monopoly on automobile manufacture in the USA because it had pioneered mass production in that sector, but soon enough competitors like Dodge emerged. Likewise, Apple had a monopoly on smartphone production with its creation of the iPhone in 2007, but within a few years, the Android system developed by Google provided alternatives. Facebook invented social media and initially dominated that field, but today half of American teenagers do not use Facebook because there are alternatives. 

In sum, there might be two initial stages in the development of new technologies: 1) the early monopoly phase, followed by 2) market competition (either imposed by the government or created by the emergence of competitors). 

Heavily regulated, private, for-profit utilities exist for natural monopolies in which competitive markets are -- as yet -- unrealistic. But technological change is inevitable. Over time, these natural monopolies disappear with the emergence of new technology and become open to market competition (e.g, AT&T in the 1970s, energy distribution today, water distribution tomorrow).

But there might be a third stage: 3) eventual mainstream obsolescence and government ownership. 

Classic state institutions, such as the military or the postal service, are typically services that have been deemed to be incapable of existing outside of government ownership, neither as natural monopolies nor within competitive markets. This may be the eventual fate of some once-dominant technologies. Although they may inevitably become marginal or even obsolete for mainstream consumers, they are nevertheless seen to serve an essential function for disadvantaged communities. 

This is exemplified by the fate of passenger railroads in the USA, notably in the creation of Amtrak in 1971 as a government-owned and subsidized for-profit corporation (freight rail was fully privatized and thrives). Amtrak turns a profit in the population-dense northeastern USA, but everywhere else it requires subsidies. These subsidies are primarily supported by Republican congressmen who represent rural constituencies that have few transportation options. 

By this logic, the oil companies, the automobile industry, telephony, social media and the Google search engine may someday become government agencies that will primarily serve the disadvantaged. (In this vein, it has been argued that Twitter has no real market potential, and yet it serves a valued public function, and that it should be made either a government service or a non-profit, like Wikipedia.) All of this might sound odd today, but imagine going back to 1881 and predicting that within 100 years the mighty railroads will have become wards of the state. 


Another pattern in the emergence of new technologies and the temporary monopolies that they give rise to is the increasing irrelevance of monopoly. Each succeeding monopoly is less central to the economy and more transient in its domination of markets than prior monopolies were. This is because these new technologies emerge in the context of a growing and diversifying economy. 
-The railroads became central to the American economy, and this centrality and dominance persisted.
-The same is true with Standard Oil, although Standard Oil was not as dominant as the railroads. 
-Ford Motor Company was even less dominant in the US economy than railroads and oil, despite the transformations it wrought.
-The telephone companies were even less central to the American economy than railroads, oil and automobiles were. 
-Microsoft in the 1990s was widely seen as a monopoly in the realm of personal computing. But personal computing was once seen as a hobby, and was never central to the economy. (In fact, Microsoft made possible personal computing for the masses by destroying Apple's monopoly, despite Apple advertising itself as a populist force against the likes of IBM.) Microsoft now seems to have slid into the backdrop of the tech industry, perhaps due in part to regulatory scrutiny, but also because of the proliferation of other products. (In the history of the smartphone, one can perceive not only Microsoft's accelerated irrelevance, but also the decentering of Apple as Android system phones captured half the smartphone market within four years of the release of the iPhone.)


This raises a question. It has just been asserted that the transition from stage one (when a revolutionary technology creates a monopoly) to stage two (when the market in question becomes open to competition because of innovation) has accelerated over the course of history, with more recent monopolies losing their grip on their market share more rapidly than prior monopolies did. But does this also mean that the transition from stage two (market competition) to stage three (government takeover of an industry in decline) has also accelerated historically? It is too early to tell, but that second transition (to state ownership) might not be long in coming after the first transition (to the market). 

And what about utilities in particular? Once again, utilities as private, for-profit corporations signify that a technology is still stuck in the first stage of development -- (natural) monopoly. The technology has not advanced to the point that it may progress to the second stage -- market competition. 

Energy utilities today seem to be on the verge of entering the second stage, that of market competition. Perhaps the best example of potentially disruptive new energy distribution technology is the microgrid, in which a localized group of contiguous electricity producers and consumers -- within a neighborhood, a college campus or a military base, for example -- are linked together on a common grid that complements the utility's greater grid. Among other benefits, a microgrid provides one level of the three levels of redundancy that ensure security: 1) household generation and storage, 2) the community microgrid, and 3) the utility's overall grid.


Microgrid is a localized group of electricity sources and loads that normally operates connected to and synchronous with the traditional wide area synchronous grid(macrogrid), but can also disconnect to "island mode" — and function autonomously as physical and/or economic conditions dictate.
In this way, a microgrid can effectively integrate various sources of distributed generation (DG), especially Renewable Energy Sources (RES), and can supply emergency power, changing between island and connected modes.
Even as the costs of and technical challenges posed by microgrids continue to diminish, legal obstacles remain.

https://www.greentechmedia.com/articles/read/the-top-6-factors-holding-back-microgrids#gs.Qd4Zg88

Those legal problems will be resolved. Energy utilities as distributors will then face competition from microgrids. At that point, the way that energy utilities are regulated will change, and the private utility model will give way to market competition between various distributors. (This would negate the Forbes article, which argued that energy distributors, as natural monopolies, should be regulated private utilities, whereas energy suppliers who use the utility's grid should enjoy open market competition.)

The main utility would not disappear, however. It would still supply the general population. More specifically, it would supply a small segment of the population that is disadvantaged and cannot self-supply at the household or microgrid levels. Under public pressure, the private utility would transform into a government agency.

Certain developments in the energy field -- reduced consumption, distributed generation -- have been promoted by governments. But these developments are also the inevitable outcome of technological progress and greater efficiencies that would have happened even without government intervention. Through its intervention, the state has merely accelerated the evolution of energy technology. Again, the evolution of bold new technologies develops according to the stages of: 
1) monopoly upon emergence, 
2) market competition as technical sophistication accrues, and  
3) state ownership as the technology becomes obsolete to the mainstream but remains an essential service for disadvantaged communities. 

In the energy sector, stage two could be commencing. Stage three could be ... not far behind.
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Sunday, July 1, 2018

Elon Musk's robots? (disruptive innovation and terraforming)

A Mars colony simulation on Mauna Loa went wrong on day four.


Does sending a manned expedition into space even make any sense? The benefits of such a mission are always kept vague and the improbability of success is elided. 

Then why does NASA talk so intently about such a mission?

Perhaps ... Elon Musk. 

Elon Musk's SpaceX is putting competitors out of business, so NASA needs to present itself as relevant. The Russian space program seems in decline, obsolete and doomed because SpaceX is driving down the cost of rocket launches. NASA might fear that NASA will come to be perceived as irrelevant in the eyes of the American public, so it revives the idea of space exploration.

In the mid-1960s, NASA's budget made up to 4.5% of the federal budget. Up to 90% of NASA's research budget at the time supposedly went to developing rocket technology, which was used for nuclear missiles. So the mission to the moon was largely a disguised adjunct to the Cold War. But there is no evidence that a manned mission to Mars would promote American technology, whether or not it is for the military-industrial complex or not. And there does not seem to be great interest among the general population for such a mission.


SpaceX might be an example of  "disruptive innovation", in which a cheaper, inferior technology finds a niche, improves, and then dominates the market. The space shuttle was designed as a reusable vehicle, but it was ultra-sophisticated, expensive and perhaps fragile. SpaceX uses old-fashioned rocket technology, but recycles the first stage of the rockets. Thus, NASA's grand concept of reusable space vehicles was reborn utilizing an older, simpler technology.

Are Musk's other companies engaged in disruptive innovation?

Tesla makes luxury electric sports cars, which is the opposite of disruptive innovation ("sustaining innovation"). This has made (some) Electric Vehicles cool and hip, but this is a niche product. In terms of EVs, electric buses might better represent disruptive innovation. In terms of the classic model of disruptive innovation, Tesla is a high-end product that can never own the future of EVs. That honor will probably go to the likes of Ford and Chevy when they manufacture boring, inexpensive EVs.

SolarCity does not seem to exist anymore. Again, Musk created a high-end, highly visible product that made an otherwise dull product, rooftop solar, hip and cool. But in the world of selling and installing solar panels, economies of scale do not apply, so large scale corporations with big budgets are at a disadvantage in relation to local businesses that operate on a shoe-string budget (e.g., relying on word of mouth for advertising). Anyone with a truck and a ladder can do this nowadays. So while SolarCity helped to grow an industry, it is small business that represents the future of rooftop solar PV. That's disruptive innovation. 

Hyperloop is a transportation system concept in which pods traveling though vacuum tubes would be powered by both maglev and compressed air. Musk claims that this will be the cheapest form of transport. That's an odd claim because the system would not only be extremely sophisticated, but it would be built from scratch, theoretically and physically. Notably, how many people want to be strapped to a chair in a small pod, traveling within a tube at 1,200 kilometers an hour? This might be something that some people might want to do just once in their lives, like bungee jumping. Yet conceivably, Hyperloop might still constitute a form of disruptive innovation in terms of transporting packages for FedEx or Amazon. One can conceive of packages being transported from provincial warehouses to major cities without touching human hands, or even needing a truck driver. This just might drive down the costs of shipping. (Also, the system would be less vulnerable to being targeted for a terrorist attack if it were used for transporting goods and not people. That would mean reduced security costs and concerns.) If used for transporting things, Hyperloop might represent a form of disruptive innovation if it is cheaper and simpler than, say, FedEx. 

The Boring Company is a tunnel construction company that would presumably build tunnels for the Hyperloop. It is currently building a tunneling machine that is planned to be ten times faster than conventional tunneling machines. That kind of sophistication does not sound like disruptive innovation. Also, in any kind of construction, the greatest costs are incurred in moving earth or water. However, if the tunnels were used to build underground communities, then this just might represent disruptive innovation, because an underground urban infrastructure would not be subject to the elements, and therefore it would last longer, need fewer repairs, and consume much less energy. Of course, most people don't want to live underground, but disruptive innovation implies a cheaper, inferior technology gaining a foothold, improving and dominating the mainstream. 


And that seems to be what Elon Musk is really up to. 

Elon Musk's real agenda is to colonize Mars. All his other efforts serve that goal.


His brother Kimbal Musk is a pioneer of urban gardening (indoor, hydroponic) and might share Elon Musk's space-colonization agenda.


This brings us back to the initial assertion above: a mission to Mars does not really make sense.

How could the concept of disruptive innovation be applied to revising space exploration?

1. The scope of exploration would be greatly limited (and cheaper). Exploration and colonization would be limited to the moon and asteroids (although this would include the asteroid belt slightly beyond Mars, especially Ceres). 
2. These expeditions would have to pay for themselves, perhaps though asteroid mining operations (at least, that is the conventional concept of how to make a profit in space). 
3. This exploration and the mining would be conducted not by humans, but by robots. 

The infrastructure that human will live in would have been been built by robots long before the arrival of humans. These robots would not be the advanced humanoid robots of Hollywood, but cheaper, simpler robots.

So that would be the next venture for Elon Musk if he models himself after Niander Wallace of "Blade Runner 2049". But the robots would be less like advanced humanoids and more like Disney's WALL-E. 

Musk's model is to apply the tech startup model to established fields. He seems to be doing this at the school that he founded, Ad Astra, where instruction is based around projects requiring problem-solving. 


This, and all of Musk's other ventures, reflect the Silicon Valley conception of disruption, in which the current way of doing something is challenged in the most radical possible fashion. 

Unfortunately, this way of doing business is often completely uninformed. For example, Musk had tried to automate production at Tesla, with disappointing results; Detroit had tried to do the same thing decades earlier with the same disheartening consequences. Silicon Valley does not do its homework in terms of historical learning. 

This is also evident in Mark Zuckerberg, the brilliant Harvard dropout. From the beginning of Facebook's founding, Zuckerberg would stress that the point of Facebook is not to make money but to change the world, because social media represents democracy. After Facebook got in trouble because it served as a tool for Russian interference in the 2016 election, Barack Obama gave Zuckerberg a long lecture. Reportedly, Zuckerberg was simply confused by Obama. This is perhaps because Zuckerberg, as a college dropout with little background in the humanities, might not understand that historically democracy has not been an unalloyed good. Zuckerberg is not historically conscious, and his overall worldview is too innocent.

Another example of how Silicon Valley might be disconnected from basic knowledge is its seeming disregard of the idea of "disruptive innovation" as it was conceived by Clayton Christensen. In the case of Elon Musk's projects, only SpaceX (so far) seems to fit the model of disruptive innovation -- although Musk's other initiatives might later conform to the classic model (as discussed above). For example, Musk's school Ad Astra ("to the stars", in Latin) limits enrollment to his own kids and to kids who are gifted and talented. This is not disruptive innovation in terms of an inferior product finding a niche, improving over time and dominating (the mid-range of) the market. But if this model were re-purposed for ordinary kids, then it begins to look a lot like ... old-fashion vocational training oriented around work projects (wood shop, auto shop). The problem is that historically vocational programs were expensive compared to sitting in a classroom, and school districts cut them back under the rationale that students can get this at a community college later on, and that they can and should focus on academic subjects first. But this rationale, with its stress on academic learning over vocational training, was simply a post-facto justification of budget cuts. If practical projects can be done inexpensively, then Musk's model of project-oriented learning would become a form of disruptive innovation for ordinary students, and this could conceivably transform education. 

Perhaps the idea of disruptive innovation needs to be refined. It could be that disruptive innovation only happens at the mid-range of the market. Even when Silicon Valley is attuned to Clayton Christensen's proper meaning of disruptive innovation, it nevertheless misunderstands that the top range does not always get disrupted. For example, the smartphone represents advancement in telephony, but is an inferior, cheaper computer; the smartphone thus represents sustaining innovation in one sector and disruptive innovation in another. But the smartphone challenges neither the upper range of the market in telephony nor in computers, which is the domain of satellite phones and supercomputers.

The venture capitalist Peter Thiel's notion of disruption in education is that college is obsolete. That sounds like a radical downsizing of educational expenses, and thus might exemplify Christensen's concept of "disruptive innovation". But it turns out that Thiel's advice only applies to students like Mark Zuckerberg, the very cream of the cream -- and only in the tech sector. Meaning: Thiel's intriguing proposal would only apply to future tech billionaires, the very high-end niche of the education market. That is a bit like a Tesla roadster or a supercomputer.

The world is enthralled with Silicon Valley, but perhaps a touch of realism might give us a better perspective. BBC News did a profile of an American businessman who said that he spent the first ten years of his worklife making products for which there is no real market, that nobody would ever want what he was making. He then said that half the startups in Silicon Valley are likewise making products that nobody will ever want to buy. It is a sobering thought.

It's also a shocking thought that if something like the Boring Company were to conform to the idea of disruptive innovation and create low-cost underground cities, then the colonization and terraforming of Mars would become an afterthought to the development of cities in the deserts of the southwestern United States. Musk's bold ideas would be even more transformative than he envisions.
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